Avery Dennison Corporation (AVY) Earnings Call Transcript & Summary

All right. Welcome, everybody, and thanks again for coming into our huge growth and ESG conference. For our next fireside chat, we're really excited to have Avery Dennison, which is one of my topics. And again, I'm John McNulty, the chemical analyst here. Candidly, they got to be one of our topics in hearing about the RFID growth opportunity last year at this very conference. Now fast forward a year, and I would say that Avery is the perfect name for an event like this where it's ESG and growth because they really thread the needle on both sides, they have a very strong growth platform, especially in the RFID portfolio. But they're also one of the leaders in the basic materials space in ESG, which we highlighted in our recent investors guide to ESG in the chemicals sector where they were one of the 2 best-in-class names that we have. So we talk to you on all of these topics as well as a host of others. We're very happy to have Senior VP and CFO, Greg Lovins. We also have the VP and General Manager of the RBIS segment, which is Deon Stander. We also have in back in the wings, just to keep us all honest, we have John Eble, who is their Investor Relations head. Now the fireside chat will last about 45 minutes or so. We have a bunch of prepared questions that really cover a whole host of topics. But at the same time, look, this is for you all to get what you need and to really have a good understanding of Avery Dennison and the opportunities that they have for you. So please send them all in, we'll try to weave them into the conversation. So first off, I'd really like to thank both of you for joining us today. Now I don't believe you have any prepared remarks, so maybe we can just dig into the Q&A. I think the way ideally, I'd like to do that is to first start maybe with things on the RFID front, some of the growthy stuff, and then we can work into the rest of the conversation, the core of Avery as well.

So Deon, maybe for those investors who may not be up to speed on Avery's RFID platform, maybe you can just give us 5 minutes to help them understand where you fit in into the RFID ecosystem, the various parts that you play in that market.

Thanks, John. And for the benefit of everybody, we're -- I'd start off by saying we're the largest RFID player in the world at the moment, and we span the entire ecosystem. We do not manufacture chips, but we do everything else. We create inlays. We insert those inlays into various form factors. We do all innovation around RFID technology. And we ultimately sell them through either directly by our solutions businesses, or we provide them also to our LGM converters who are able then to provide them into the market. We've built the business over a number of years using and leveraging a particular set of skills that we think that we have, first of which is around our process technology. We're known within our business as a significant ability to generate high volume manufacturing and process engineering and excellence. And we've built alongside that a very strong go-to-market team that is recognized as the market leader for providing retailers and brands and end customers, the solutions know-how and mechanism to extract the most value and return on investment for all their technology investment, particularly around RFID.

That's perfect. It's a great intro for us. So when we think about the RFID arena, it's -- over the past couple of decades, it's had its fits and starts. It really does seem to be kind of hitting its stride at this point. We can see that in your growth. But even looking beyond that, clearly you're seeing it proliferate into other areas, et cetera. So it certainly seems like things have kind of reached a tipping point and we passed that. Can you help us to understand what's helping to drive that growth? What's really kind of helping to kind of move companies or industries even, that really weren't participating, or were thinking about it but not really getting there? Maybe you can help us to understand what's got them thinking about it, but not really getting there? Maybe you can [indiscernible] and really investing heavily in RFID as a solution for a lot?

Sure, John. I think everybody will know the technology in and of itself has been around for a number of years. But I think it's the application of the technology, the evolution, and then also the ability to show that there is a return on investment to solve some very strong issues that customers ultimately end up having. And while RFID has certainly grown dramatically in the apparel segment, we're now seeing significant traction also in other verticals including, as we've mentioned before, food, logistics, beauty, et cetera. And I think a large part of this is because those problems that I think we see at the macro level around the world issues of provenance, how do we know where things are made and how they came to be at a particular place issues of sustainability, how sustainable is the product was made and what is its end-of-life cycle ability to recycle it or to end purpose it. And then particularly things around labor challenges that retailers typically face, whether they're apparel retailers or food retailers. All of these factors built also on the need for increased speed and transparency have made this particular technology, a really useful piece for being able to address those concerns. So in apparel initially, much of the rollout that you saw would have been around how do we make sure we have accurate inventory through the supply chain. Visibility to that inventory allows for better gross margin expansion, better decision-making around what goes on to floor, how much inventory you have to hold at any one time for safety stock, particularly in an increasingly omnichannel environment where apparel retailers particularly are leveraging their stores as almost fulfillment centers, buy online, pick up in-store. And so the need for inventory has certainly driven a lot of the apparel adoption. And it's, I think, just at the part where it's starting to really expand now. Those similar features, John, around availability, speed, visibility and accuracy and labor efficiency are certainly what's also driving some of the traction we're seeing in our pipeline through pilots and trials and rollouts in food and logistics. And in those 2 segments specifically, food is very much around the provenance. Where did something come from? How fresh is it? Will it make it through to where it needs to be? Then there's a case also around labor availability and particularly in quick-service restaurants. How do you utilize the productivity of taking inventory into a particular quick-service restaurant very efficiently, freeing up the labor to do other more value-added tasks. And then finally in store at retail level, even in food, there's a whole piece around perishability and visibility and inventory productivity to make sure you can extract those items. In logistics more recently, we've seen a lot of progress and pilots and trials around how do logistics company identify high-value or particularly unique items that they have to keep an eye on, given through a very complex supply chain. How do they track whole pallets, particularly through the supply chain as well. And more recently at the parcel level, how does some of that come to bear when there is time sensitivity around parcels that needs to be ensured that it gets tracked over 1 or 2 days. And I think that will start the process for rolling out across the broader logistics segment as well.

Got it. No, makes sense. We got we actually got a couple of questions in around that, and I think we can probably lump them in together. So when you think about COVID over the last 18 months and now this year with all the freight-related problems as well, I guess how has that had any impact on the demand and the interest in RFID? Or is it really too early to tell at this point? I guess how should we be thinking about that?

Well, I think the supply chain challenges and just general labor availability, I think, which is -- which we see across many markets, has certainly accelerated need for many companies to say, "How can I automate as much as is possible? And then how can I have certainty of where that item is from a visibility perspective?" When you put those 2 things together, it certainly has put a premium on both retailers and other companies trying to understand how to leverage technology. RFD is just one of those, but certainly is one of the more stronger cases that allows it to be done at a very effective return on investment that we've seen across all these verticals as they go to market, John.

I think the other thing to add to Deon's point is we'd already started to see a shift towards e-commerce and omnichannel retailing pre-COVID, so to speak. And since then, we've continued to see the need for very accurate inventory to be able to deliver in a more omnichannel environment. So if you're buying online and picking up in store, or maybe you're buying online and that retailer's using their stores as their distribution hubs for instance, you have to really make sure that there's strong inventory accuracy to be able to execute that well. So those were drivers of RFID already in the past, and that continues to have been accelerated, I think, over the last couple of years.

All right, Greg, maybe to that, when we think about the apparel side, I think if I remember correctly, about a year ago or so, it looked like about 1/3 of the industry had kind of moved in the direction of RFID. I guess for those that aren't moving there or they haven't yet, I guess what's the thing that holds them back? I understand in some cases, look, the apparel may be so inexpensive that it may not have enough value to actually put that type of an investment behind an entire system. But that can't be 2/3 of the entire global apparel market. So I guess how should we think about maybe what are the hurdles to getting companies, customers over that bar?

I think John, what we've seen so far, and that this has been historically true across the apparel industry, is -- one is the prioritization of issues that they made themselves have as retailers. Accurate inventory is just one, and it's certainly a critical piece. But there may be other priorities that retailers are facing to do with their own store infrastructure, their own systems infrastructure, their own prioritization about range and merchandising, which may have a higher importance for them. I think I've said before in other conferences that we don't see there's a reason why every apparel retail at some point will adopt the technology, but it's just in the order of priority that they face with their own set of circumstances. I think the other piece, and this is you're right to point it out, is that we're continuing to see a broader expansion not just within certain apparel segments, but broader store. So even where we have general merchandise retailers, we're starting to see that also getting leverage into other categories to leverage both the scale of what they've implemented and also to take advantage of the returns that they're starting -- they have seen both from margin expansion and productivity from a labor perspective as well.

Got it. No, makes sense. Maybe sticking with the apparel side at this point, I guess it does seem like we were talking before. It does seem like there's an enhanced focus on knowing where products are at all times, being able to expedite things as quickly as possible. Can you speak to kind of the depth of your pilot programs, how it kind of compares with what you saw, say, 2 or 3 years ago? Are we accelerating at this point? Are we kind of at a good, steady pace? Like I guess how would you characterize it?

If I took a step back from the whole of our business, John, I would say that we continue to see a very robust pipeline across all segments. Clearly for us, apparel is still the largest part of the adoption and the absolute volume as well as the likely revenue as we move forward to the near term. But we're seeing an accelerated rate outside of apparel for adoption, which exceeds the actual adoption piloting and trialing at the moment. Most of the retailers and brands in apparel that we've seen are on the path to adoption at some point, whether it's in pilot trial or further rollout. But we're seeing a continued focus and emphasis from outside of apparel and nonapparel, particularly in food, logistics, beauty and the start of some other pieces around pharmaceuticals and automotive as well.

Got it. And so maybe we can speak to the food side of the equation. Because when you think about the vastness of it, it's pretty big. At the same time, it has taken a long time to kind of get there. Would you say right now, it's more -- when you're dealing with your customers, it is more about the food safety-related issues? Or is it more about labor savings? Or I guess how should we think about the value proposition that they're really focused on that's really kind of pushed them to this new level of attention?

I'd say firstly, it's around labor efficiency across whether it's in retail or whether it's in grocery retail or in food, quick service restaurant. But very closely followed by provenance, where is an item, how fresh is it and where is it getting made. I think those are the 2 key pieces at the moment, John, that we're seeing a large amount of pilots and trials focused on.

Got it. And we're hearing a lot more now about how health care is looking into these opportunities. Logistics, food, but not just grocer food, like even -- I mean we're hearing Starbucks maybe starting to put potentially RFID tags to help service their customers more quickly and effectively. I guess how would you -- or where would you say we are in those areas in terms of adoption? Because it does -- and some of them, admittedly I don't even completely understand the true value proposition yet. So I guess can you help us to understand, one, maybe what the appeal is? And two, where we are in the process of converting those types of industries over to RFID?

I think in our Investor Day materials we laid out a few months ago, John, we sort of had a document in there that sort of laid out the characteristics of the various segments as well as the benefits. And I think one of the things you'd see across that is that the benefits tend to be very similar across some of these verticals. And the characteristics, while somewhat different, allow for the same benefits to be shared. So whether you're in food or logistics or in pharmaceuticals visibility and traceability and labor efficiency are a consistent theme. And clearly, this technology enables that. That's been the learning we've seen apparel, and we've taken that forward. Provenance, where things are made, is a coming force, particularly as it relates to sustainability. And again, this technology allows you to create that digital identity at the start of an item's life and give it a digital twin as it goes through its life. And that itself is going to be a key part of the use case moving forward. So I'd say that's the first piece. I think where we are I'd say in apparel, we probably -- to use a sporting analogy, we're probably at sort of the beginning of the fourth innings. And everywhere else in most of the other verticals, we're really in the first inning still, and this has a long way to go.

Got it. Got it. Fair enough. So one, I guess, thing that we had heard recently, it sounds like -- which could be an exciting opportunity is from UPS. And they've been public about it in terms of they're looking to go RFID on all of their parcels going forward. I guess a couple of questions on that. Clearly, it's a big opportunity. I guess do you see this as the beginning of a lot of other participants with maybe UPS being the leader, but a lot of other participants going into this area? Or do you see it as a one-off?

Well, I'm not going to comment on individual customers or companies, John. I will say that we're seeing quite a lot of interest within the logistics segments with all the key players, and we're participating in pilots and trials with most of them. And I think again, it's because everybody in this segment has realized that the velocity has increased, the volume has increased. Particularly with e-commerce and the amount of shipments that are going up, there's a velocity requirement. And at the same time, there continues to be an overall labor challenge in the whole industry. And so when you put those factors together, there's an absolute need for automation and a higher requirement for that, that's coming. And that's what I think is prompting some of the accelerated interest in this technology.

Got it. No, makes sense. And yes, it certainly seems like that would be one of the more intuitive areas, I would think, in terms of opportunities for RFID once they can get the system in place for it. So I guess when we think about that, I know Avery's spoken historically about look, we think 15% to 20% is kind of a good growth rate for the foreseeable future. I mean when I speak to just that one logistics customer who, again they've been pretty public about what they're looking to do, that gets you most of the way to the bottom end of that range already without taking into account any other growth from any other parts of the industry. So clearly, things are going well, maybe even better than what you were looking for. But can you speak to the investment that's needed to keep up with such a robust growth level? And how should we -- how should investors think about the capital that's required to actually meet that really accelerating and growing demand?

Well, let me just reaffirm, our continued focus and commitment is to delivering that 15% to 20% growth over the long -- over the next 5-year horizon, John. That's been our consistent message. We believe that is absolutely deliverable because we can see an accelerated growth in some of these. Now as always, technology adoption comes at different paces by different customers and different times. And there will be degrees of lumpiness that come across in those periods as well. But we believe consistently across that time, we should see that type of growth rate. To your second question, would you mind repeating what the second question on that was, John?

Just in terms of how you keep up with the investment side of it, in terms of keeping up with that kind of level of robust growth.

Well, we've been pretty transparent that we've been investing ahead of the curve in this technology as one of our key high-value segments. We continue to lean forward. And we've been deploying capital to ensure that we are not only capable of dealing with the growth that's coming, but in fact we'll be ahead of that growth as well. And that's in the context of us continuing, as part of one of our core strategies, to be very efficient stewards of capital across the whole business. But in this area as a high-value segment, we will continue to invest ahead of the curve.

Is there anything to think about...

Yes, I think we haven't quantified how much we're investing there in RFID. But certainly as Deon said, we're always investing for each year to at least be able to meet what we think is a year out from now in demand. So we're always investing ahead of the curve from a capital perspective, and we'll continue to do that as the business gets bigger as well. At the same time, we're also investing in resources to help drive these other segments that we've talked about: logistics, food, other, health care, wherever it may be. So investing in the business development resources and things like that to help drive those other segments. So this is a big area for us from a capital allocation perspective overall when we look at both fixed capital as well as SG&A and growth investments.

Got it. So we got a question that came in from the audience a few minutes ago, so it maybe kind of fits into this area. So we've been hearing a lot about semiconductor shortages. You kind of heard that through the whole industry. And while it's been a lot more focused on maybe the auto impact or certain industries, I guess we have heard, and admittedly we've kind of paid attention to this as well a bit, comments from companies like [indiscernible] who I know is a big supplier, a big participant in the RFID chip side of things, that they're kind of going hand-to-mouth at this point. I guess how do you get comfortable with your supply chain that you can manage the growth, again beyond just your own capacity and making sure you've got what you need? How do you manage that with your suppliers?

Well, I think we rely on the strength that we've demonstrated over the last 10 years or so, John, that as the largest player in the industry, we have some of the greatest visibility and greatest partner and supplier relationships. And to that end, we've made sure that we have access to enough capacity and capability to deliver for our customers. Are there times at which we need to move things around to ensure that we can deliver against it? Yes. But we've certainly made sure we've been able to do so without any interruption to our customers so far, and that will remain the case as we move forward as well.

Got it. And maybe one last question on RFID and then we can move on, because there's a lot more to Avery as we all know. When you look at the different participants in the industry or different customers throughout the industry, it seems like the value proposition, while similar in terms of what's driving it, it may be bigger for some relative to others. I guess how do you think about that when you're partnering with customers? And also when you're pricing the products, do you price it on a -- every tag is basically the same? Or do you price it on the value proposition that you actually offer your customers? How should we think about that?

Well, I think the value proposition is the starting point at the end of the day. Because this is not just a simple price product that delivers significant value to the end customer. Understanding that has been one of the hallmarks of our market development and commercial teams. They are the recognized leader in this area. They'll be able to provide great thought partnership and leadership for our customers to say, "This is not only how you adopt but the mechanisms that you go through, and this is what you should look for in terms of expected return on investment." Selling that value or creating that value in front of the customers has been a key part of the way we position the overall product and the solution set. And so while items may ultimately end up getting priced at a per unit level, they vary depending on the intensity of the product, the design, the shape of the product that actually attached either to a garment or to an item of food. And so the price point is less relevant than actually the value creation. Because at the end of the day, you're expecting typical returns, if you're a retailer, that are shorter than a year's cycle to be able to realize the investments you're putting in.

Sure. No, it makes sense. So maybe we can move into some other areas. So Vestcom is an area, you made the acquisition. You closed on it. For those that don't necessarily -- aren't up to speed on it, it's a high-margin, high-growth business where it's essentially kind of -- I mean I guess to simplify it, it's the tagging of shelves in stores. And it's completely vertically integrated into computerized software that helps processing of this throughout a store. And I'm probably not doing it nearly enough justice in terms of describing it. But I guess can you speak to first of all, how it's going? I know it's a little bit early, but how it's going? And also help us to understand kind of the aspirations of what bringing this asset into the fold at Avery, what your real aspirations are in terms of really driving growth going forward?

And John, I'd say we continue to be very pleased with the progress of the acquisition of Vestcom. As I think we said before, it's a very strong business, very strong leadership team, above-average margins for us. And it has a unique position in its marketplace. It is a company that I think you said delivers labels to the shelf, but it's much more than that. It's a significant business that generates and manages complex data from its retail customers, whether they be planogram data or pricing data or promotional data, and synthesizes that down into a label format that employees can deliver in walk sequence for highly efficient labor use in the store. And at the same time has an additional ability, unique I think in the market, to be able to leverage that real estate of that label, which contains the price and perhaps a promotion, to also drive a brand equity message from either a CPG or a retailer. So the unique value proposition that they've been able to create. And so far, the focus that we've had between the 2 companies is not on integration but actually an acceleration, and how do we make sure that the combined capabilities of the Avery Dennison business and the Vestcom business are best seen by those retail customers. We've also been very pleased with the validation that the level of trust that the customers have is seen at the highest level of their retail food customers or drug customers or dollar customers. And that's a validation not only of the value that they bring, but also of our ability to use that to present the broader integrated Avery Dennison solutions. And the logic that we've used up until now, and we've been very clear about, is we see this as a highly synergistic acquisition for RBIS. Both businesses in the legacy RBIS business and within Vestcom are very much focused on processing and managing variable data. It's going to help us accelerate our portfolio further on our high-value segments. And this is a business with very strong track records across cycles of delivering consistent high-value returns. And the final piece for us is that it does provide us an opportunity to accelerate our Intelligent Labels strategy across some of the food and drug and grocery retailers that they have.

And maybe to that, maybe we can flesh that out a little bit more. Like you've got pretty good growth businesses already. I mean and Vestcom themselves was -- it has a pretty good growth business at steady, stable growth. I guess help us to understand the acceleration part and how 1 plus 1 equals more than 2. Because it sounds like you've got some pretty high conviction that is going to be the case. I guess help us to understand that maybe a little bit further.

Well, if you think about us, the legacy Avery Dennison RBIS solutions around inventory accuracy, leveraging Intelligent Labels; and if you tie that to at shelf pricing, promotion and brand equity messaging; when you put those 2 things together, I think there is unique value to be created for retail customers in not only the visibility of the item where it is through the supply chain and in the back store and on shelf, but also tying that to the actual price point, the promotion and the brand message that somebody may want to create. So I think the combination of those 2 things we see not only provides I think the retail customers the next frontier of engaging directly with consumers on almost a one-to-one basis, but also will provide further value for them in terms of productivity at a labor perspective and a holistic consumer experience when they get into -- for their consumers when they get into store. And I think the promise of that, I think will help us drive our Intelligent Labels business even further and quicker.

Got it. No, makes sense. And that definitely kind of helps us at least to think about it. Maybe we can shift over to the LGM business. Obviously, it's the biggest division that you've got, so certainly what we want to cover at least to some degree. So it's done really well despite a very difficult raw material environment, especially in the second half of 2021. At the same time, we're looking at some pretty positive trends at least for you guys when we think about the raw material environment. We've got propylene down 6% in the last month. It looks like some of the capacity that was off-line on some of the derivatives are actually coming back online. So I guess are we starting -- are you -- first of all, are you starting to see that? Or does it take a little bit of time to kind of work its way through the system? And how should we be thinking about 2022 and maybe the ability to catch up in terms of some of the catching up to some of the raw material versus pricing spreads that you've been dealing with the whole year?

Yes, John. So as we said at the end of the third quarter, what we were expecting for Q4 was about 20% year-over-year inflation, largely concentrated in our materials businesses between LGM and IHM. And that's -- those are very global businesses. So while you may see some indices move in one region or another on certain activities, like you mentioned propylene in the U.S., given the global nature of the business, I think things move differently in different regions. And we continue to see in other regions, challenges on things like energy costs and other inputs to materials. So I think there's a pretty broad basket there that when you look at the macro, while some things have improved, we're still managing for what's happening on a more global basis. And our approach is as we've talked about many times in the past is to have multiple plans. And we do a lot of scenario planning and things like that to really think through, okay, what the situations may be and how do we react in those situations across the globe. And that's a playbook we've been executing over the last couple of years, obviously very well, and we'll continue to do so regardless of those environments. And we have seen propylene dip back in the U.S. back in Q2 and then it went back up. So again, we're managing for that environment to continue to be potentially up and down. And we're going to have a playbook to deliver regardless of what that looks like.

Got it. And it does seem like maybe some of the raw materials are coming off. But in general we've got a pretty inflationary environment, whether it's labor or freight or what have you. So I assume -- I mean -- maybe a better way to phrase it, is it fair to assume that the pricing that you're pushing through now is really going to more completely help to cover that portion of the inflation? It's not just about the spike that we saw around whether it was the hurricanes or what have you. Am I thinking about that right?

Yes, I mean I think as you've heard us say before, I mean we have multiple things and levers that we're driving to help offset inflation. And that includes material inflation, freight inflation, wage inflation, those type of things. And it's a combination typically of pricing but also productivity actions. Some of those productivity actions are around material reengineering where we're looking at how do we take cost out of our materials. But there also productivity within our sites that help offset wage inflation like we see every year, for instance, which make it a little bit higher in the near term depending on how that evolves, but continuing to look at productivity actions. So it's a combination of those things across the company that we look at to help offset these inflationary pressures, not just the pricing side. But certainly as we talked about at the end of last quarter as well, from a material price gap, we continue to have a gap through Q3. And we said we expect when things start to stabilize a little bit, it does take us 3 months or so to offset that. So that's how we continue to think about it.

Got it. Got it. Fair enough. And I think one of the benefits it seems that Avery may have is around vertical integration. I mean you do some of your own adhesive production. It's not just everything is bought from outside is at least our understanding. And certainly in this kind of a crazy freight environment and supply chain problem a couple of years that admittedly we've never seen before like quite like this, it's obviously been a big benefit to you. Does it change how you think about the need for vertical integration? Or maybe putting it a different way, do you need to be even more vertically integrated? Or are you comfortable with where Avery is at this point and where you can meet your own needs going forward?

Yes, I mean I think we're comfortable we're -- a couple of things. One, so typically -- particularly in our materials businesses, we are producing or manufacturing in the region that we're serving. So if we're serving a country in Asia, we're typically producing in that country, for instance, and trying to source more and more of those raw materials locally. So you don't have as many of these constraints moving things across the globe. From a backward integration perspective, certainly producing our adhesives, producing many of our own films within the LGM business as well. Certainly, it's helped us manage supply chain constraints and things as well across the regions. The other thing, a big thing it does for us is help us innovate. So this is an area where, because we're able to formulate and produce our own adhesives and formulate and produce our own films, it allows us to continue to find ways to take costs out of our products, but also to help innovate and drive new solutions for our customers to drive more sustainable solutions, which we talked about at the very beginning or you mentioned, a part of a big driver of the company is continuing to drive more sustainable products. And being able to have that backward integration, that innovation capability is really not just helping us manage in this environment, but helping us thrive for the future as well.

Got it. No, makes sense. So maybe we can shift over to the I&HM business. It's one where I think that's -- it's been an area where you set some pretty high targets in terms of margins where you hope to get the business. It's probably the only, if I could -- I don't even know if I call it a blemish, but it's probably the only thing that where you haven't far exceeded kind of the targets that you've necessarily put out there. I guess can you help us to understand what gets that business to where you need it to be? Do we just need to see the volumes come back? Admittedly, the last year or so with a lot of it tied into autos, I'm sure there's been some struggles just around the volumes there. But I guess what gets you to your targets? Is it more efficiency measures? Is it just the volume? I guess how should we think about that?

Yes, so I think we've been steadily improving that business over the last couple of years through a number of actions. Some of those are around productivity, improving our footprint in a number of our businesses where we've taken some footprint reduction actions. And we've been closing those out as we move across the course of this year. So we've continued to find ways to get leaner. We've continued to find more opportunities to leverage our strengths in LGM. We shared adhesive development and production capabilities. For instance, we share operational leadership. So really ensuring we're driving and leveraging those strengths of LGM so that we're able to operate, even though most of the IHM businesses are much smaller, operate and take advantage of the much larger materials businesses that we have. So I think there's been a number of actions we've been driving. And we, of course, we're seeing a lot of that benefit over the last couple of years. Certainly, this year in the back half of this year with automotive slowing down quite a bit, that's had an impact. That's about 1/3 or a little less than 1/3 of the revenue base within IHM. So that's been a little bit of a challenge here over the last couple of quarters. As well as just IGM is dealing with the same material supply and inflationary and freight increase pressures that we've talked about for LGM as well. And very small dollar impacts have a bigger impact on the margin, just given the size of IGM of course. So that's been a challenge. But I think overall for us, we're confident we've got the right structure in place. We're continuing to drive growth in the higher-value businesses, which are largely our industrial tape portfolio there, continuing to get more and more productive in our assets. And I think when we start to see some improvement in the end markets there, we'll get the improvement in the margins as well.

Got it. No, fair enough. So maybe you can speak to one of the many positives that Avery brings to people or investors is you have massive cash generation. And that has been the case for quite some time. And even with the Vestcom acquisition, you still have a balance sheet that most companies would love to have. And you have another round of cash coming in this next year. So I guess can you speak to, first of all, the M&A pipeline and environment? How -- what you're seeing there? If you've got a pretty full pipeline out there? We have seen a lot of M&A across the materials space, admittedly at a higher multiple. So I guess maybe help us to think about what you're seeing, and then maybe we can dig into that a little bit more in a minute.

Yes. So certainly, we've been pretty focused on M&A over the last couple of years as a way to continue to accelerate our strategy. So we've talked a lot about higher-value categories in particular, one of the areas we're focused on, kind of shifting our portfolio into these higher-value categories. And that's where pretty much all of the M&A we've done over the last 4 or 5 years has really been focused in these higher-value areas. Businesses like Smartrac that we closed in 2020, or Vestcom we talked about already here a few minutes ago, so continuing to leverage and drive our growth in higher-value spaces. And we've really shifted just the culture of the company, the way across the company, our business units are thinking more externally, looking for more and more opportunities from an M&A perspective to help drive and strengthen our businesses or to provide new capabilities to us, not just where we can leverage our capabilities on another business. So really looking at building our capabilities. Most of our M&A is focused, as I said, in these higher-value categories. And we continue to build a very strong pipeline there. And as you said with even after the Vestcom acquisition, we expect to be at the low end of our targeted leverage range. We've had a lot of dry powder. We've built that up over a long time, and we continue to be at the low end of that target. So we have continued strong capacity to invest organically. Like we talked about the investments we need and continue to make in the Intelligent Labels business as well as the other high-value businesses within the company. Continuing to look at M&A opportunities to strengthen our high-value categories and then obviously continuing to return cash to shareholders. So we feel confident with our position there and continuing to have the capacity to invest even after the Vestcom acquisition.

And would you characterize what you see in your pipeline right now in terms of opportunities? Does it lean at this point more heavily toward the retail side, like the tagging side of your business, like the RBIS side? Or does it lean more toward the materials side? Or is it pretty evenly balanced? I guess how should we think about that?

Yes. So I think it's broad. I mean all of our business units, as I said a minute ago, are really focused on how -- what opportunities do they have to help strengthen their businesses or improve their businesses, or what opportunities can they provide to another business to help strengthen it from an M&A perspective. So I think across the company, the businesses are working on what that portfolio is and/or I should say the business are working on M&A that's part of our broader portfolio. I think certainly when we're looking at Intelligent Labels being a big opportunity for us, as we spend a lot of time here today, that's an area we continue to think about opportunities as well and around that space. When you think about Smartrac was obviously very square in the Intelligent Labels space. Vestcom we talked about we think, over time, help strengthen Intelligent Labels as well. And we'll continue looking for opportunities there because that's obviously a big driver for us in the future. But I think the pipeline is being built up across the company, and we'll continue to evaluate that as we go.

And maybe you can speak to just the valuations that you're seeing out there. Because admittedly with as much M&A as we've seen across the space, we've also seen that kind of have some helium-type approaches to valuation. So maybe you can help us to think about how you think about investing? And how you think about M&A and valuations? And what's a bridge maybe too far? Or if you've got specific metrics that we should be thinking about as we look to your M&A profile or outlook?

Yes. I mean certainly, multiples have increased broadly and in the space, as you said. Our focus, as you know, is on driving economic value or EVA over time. So when we look at any investments organically or through M&A, our focus is on how do we generate or how do those investments help us generate more economic value. So we measure the company on EVA. When we're making an investment or an acquisition, we're looking at how do we generate positive EVA from that in a relatively quick time period. So generally, we're taking an EVA lens, not just a multiple or whatever it may be, but looking at how does this acquisition help us drive EVA growth. Our focus is on continuing to drive growth above GDP, continuing to be efficient with our capital, continuing to drive strong margins to help us continue delivering strong return on capital or top quartile return on capital. And that balance of strong top line growth, capital efficiency and strong margins really is a recipe for EVA growth over time. And that's how we think about it. And that's how we approach our any investment we're making is really with an EVA lens.

Got it. Okay. No, makes sense. So we got one question that was e-mailed in. It was asked, you've got your materials segment and you've got your smart labels segments. How do the 2 necessarily intertwine or overlap? Like is there value having the 2 linked together? Or is it just more a function of coincidence and history and it kind of it is what it is? I guess how should investors think about that?

Maybe I'll take that. I think John, it's very clear that for our 2 largest businesses, we're the market leaders in our space. And that gives us scale and significant advantage as well. But as we've demonstrated with, for example, our Intelligent Labels business, which was an RBIS business that has increasingly become a broader company platform, we're clearly leveraging the competencies, the unique competencies to each one of those businesses to ensure that we're actually delivering and creating more value overall. So we've leveraged, as an example, the process technology skills and capability that we have in our LGM business to enhance the efficiency and effectiveness of our intelligent label platform. Similarly, we use the access and reach we have to end customers to inform how we innovate not just in, let's say, the legacy RBS business but also the materials piece that touches all through that in LGM. So there's a focus around clearly delivering for each business unit. But at the same time, we have competencies that cut across the corporation that give us advantage, and we will apply and use those when necessary.

And I think just to add on to Deon's point is part of our strength in the apparel business within RFID was certainly helped by our strength in just apparel labeling and the channel access and everything that we had there. When you look at LGM, LGM is serving obviously a very broad group of end markets. And they have access to those converters and end users in those end markets. And that's really where we also look at driving IL through those channels within LGM. So they're very highly synergistic from that perspective when we think about Intelligent Labels more broadly. And obviously, LGM is serving our label markets across a number of different end categories.

Got it. No, it makes sense, and that's definitely helpful. So I mean we're running kind of towards the end of time. I guess the one thing I did want to ask just on the ESG front, you guys do have really, when I look across our space, have really taken on kind of a leadership role in terms of disclosure, in terms of targets, in terms of some of the initiatives that you've had. I guess can you speak to how you weave that into the day to day of the actual businesses? Because a lot of companies, it seems like they have some pretty aggressive goals. I think they are aggressive and it never quite completely connects there. But you have got a good track record of already exceeding goals that you've set out a while ago. So I guess how do you guys do it? What's the magic dust in getting it to work?

Well, I'll take that, John. First and foremost, I think we've started a long time ago. We were very deliberate about saying we needed to have goals in the middle of the 2010s to say we need a goal for 2025. We laid this out. They were largely around carbon intensity, waste and so forth, but also goals that talked around our products and solutions. And as in everything that we do, once we establish goals, we have a very disciplined execution focus around assigning accountability and actions through the organization to delivering against those. You've seen the progress that we've made. And then last year in follow-up to continue to challenge and exceed where we made progress, we've laid out our goals to 2030 around those 3 categories: delivering innovation to enhance the circular economy, continuing to focus on reducing our environmental impact in our -- not only our own operations but the whole supply chain; and then continuing, as we have done, to make a social -- positive social impact by enhancing not only the livelihood of our people, but the communities we operate in. And the mechanism that we do it is the execution machine that you've seen typically from Avery Dennison. In addition to that, all of our executives are tied to making sure they are and held accountable for delivering against our sustainability objectives. We think that our scale of business overall in the industry we operate affords us a position to take a market approach that will guide the industries to where we need to be for their own, our customers' own ESG requirements in the future. And that's a responsibility where we think is something that we need to do as an industry leader.

Great. Well you certainly -- as we highlighted in our recent report, you certainly are one of the leaders in the industry. And you've done a great job with it, and good luck with it going forward. So I think with that, we're out of time. So Deon, Greg, really appreciate you taking the time to really walk us through some of the growth opportunities and some of the challenges that you've easily hurdled over. Or maybe easily is not the right word, but you've clearly hurdled over. And we're looking forward to great things as we get into 2022 and beyond. So thanks again very much for the time. Really appreciate you joining us today, And with that, we'll end.